The Islamic Development Bank Institute (IsDBI) and IE University, through the IE Foundation, have launched a joint initiative aimed at developing legally enforceable, Shari’ah-compliant risk-sharing financial instruments for startups operating in civil law jurisdictions.
The project addresses one of the most persistent structural gaps in Islamic finance and venture funding: the difficulty of adapting widely used startup financing tools—such as convertible notes, SAFEs, and simplified preferred equity—from common law systems to civil law environments, while maintaining full compliance with Islamic finance principles.
Why This Matters
Early-stage ventures in Europe, North Africa, and much of the Middle East operate under civil law systems that lack the contractual flexibility found in common law jurisdictions. As a result, many Islamic-finance-aligned startups face higher transaction costs, longer negotiation cycles, and limited access to scalable early-stage capital.
By contrast, risk-sharing instruments such as convertible notes and SAFE agreements have been central to the growth of startup ecosystems in the United States and the United Kingdom—largely because they simplify valuation discussions, reduce legal complexity, and align incentives between founders and investors.
However, these instruments often rely on legal concepts that are either underdeveloped or incompatible with civil law traditions and Islamic finance requirements, particularly prohibitions around interest (riba), excessive uncertainty (gharar), and speculative transactions.
Bridging Islamic Finance and European Civil Law
The IsDBI–IE University collaboration combines comparative legal research, Islamic finance jurisprudence, and contract design to assess how existing risk-sharing models can be re-engineered for civil law systems—starting with Spain and extending to the broader European Union.
The initiative will:
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Review existing Shari’ah-compliant risk-sharing structures
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Evaluate their compatibility with Spanish and EU legal frameworks
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Identify regulatory and legal constraints affecting adoption
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Develop standardised contract models that are both Shari’ah-compliant and enforceable under EU law
The resulting instruments are designed to be adaptable across EU member states and transferable to non-European civil law jurisdictions, including North Africa and the Gulf, where hybrid legal systems are common.
Beyond Startups: A Broader Development Agenda
While the immediate focus is early-stage ventures, the project also examines how these instruments could support entrepreneurship more broadly—particularly in sectors aligned with ethical finance, social impact, and real-economy value creation.
The initiative aligns with wider European policy developments, including the emerging EU-INC (European Inclusive Company) framework, which is expected to facilitate innovative corporate and financing structures across the continent.
Leadership Perspectives
Dr. Sami Al-Suwailem, Acting Director General of the IsDB Institute, said the project marks a strategic advance for Islamic finance:
“This initiative translates Islamic finance’s core principles—risk sharing, fairness, and real economic activity—into legally robust instruments suitable for modern startup ecosystems. By anchoring these solutions in European civil law frameworks, we are creating scalable models that can be adopted across Europe and Muslim countries with civil law or hybrid systems.”
Dr. Celia de Anca, Deputy Dean at IE University and lead researcher on the project, emphasised its timing and relevance:
“Startups are critical engines of innovation and social value creation. Islamic finance principles are highly relevant today, but they need practical legal instruments that work across jurisdictions. This initiative responds directly to that need, especially as Europe moves toward more inclusive corporate frameworks.”
Strategic Implications
For Islamic finance, the project represents a shift from theory to implementation—moving beyond conceptual alignment toward deployable legal tools. For Europe, it signals growing institutional interest in ethical finance models that can mobilise capital without undermining legal certainty.
If successful, the framework could:
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Lower barriers to Islamic venture capital in Europe
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Improve capital access for Muslim and impact-driven founders
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Strengthen Europe’s position as a hub for ethical and inclusive finance
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Provide templates for civil law economies seeking alternatives to debt-heavy startup financing
